Shares in National Australia Bank, the country's top lender, have lagged peers by far in the past six months as investors fret its acquisition moves are distracting it from the core banking operations.

The stock is down 6.2 percent since August, compared with a 10 to 20 percent rise for rivals Commonwealth Bank of Australia, Westpac Banking Corp and Australia and New Zealand Banking Group.

The decline would look uglier had the shares not rallied a tenth since late February as speculation grew the Australian competition watchdog would block its $12 billion bid for AXA Asia Pacific, a unit of France's AXA.

Will the short to medium term direction of NAB's shares be pegged only to the outcome of the AXA bid, or are there other factors too that bear watching?

ROUGH DIAMOND

The acquisition risks are overplayed in the bank's share price, given its strong capital position and compelling valuations, some investors say.

I think all the bad news is in the share price, said John Murray, managing director of Australian investment manager Perennial Value, 7 percent of whose portfolio is made up of NAB shares. We do see strong earnings upside.

NAB, which boasts the second-highest tier 1 capital ratio of 9.3 percent among major Australian banks, trades at 12.6 times forecast earnings for September 2010 compared to 14.8 times for CBA, 13.9 times for Westpac and 14 times for ANZ.

The group's banking operations should benefit from the upturn in the economy, bolstering its business banking division, Murray said.

NAB is expected to grow its net profit by nearly a fifth for the year ending September 30, 2010, according to Thomson Reuters I/B/E/S data. Of 13 analysts covering NAB, six rate it a 'buy' or 'strong buy', two rate it a 'sell' or 'strong sell', while five have a 'hold', the data shows.

NAB is awaiting a ruling from Australia's competition watchdog on its bid for AXA Asia Pacific which is due on April 22.

It is also weighing whether to bid for Royal Bank of Scotland's UK branches to strengthen its operations there.

Perennial's Murray played down fears that NAB would overpay for AXA Asia Pacific, saying Chairman Michael Chaney, who has a track record of making smart acquisitions at Wesfarmers as its CEO, will ensure acquisitions are carefully thought out.

PATCHY RECORD

Some, however, feel NAB's track record of M&A is poor and it does not need AXA Asia Pacific as it is already a dominant force in wealth management.

A badly run bank is never cheap, says CLSA Asia-Pacific Markets analyst Brian Johnson, adding NAB's underperformance in the past was a direct result of a track record of consistently shareholder value-destructive strategic initiatives.

Analysts say NAB has consistently overpaid for acquisitions and then under-executed on integrating businesses to the extent its earnings have been permanently diluted.

It made a disastrous foray into U.S. homelending in the 1990s, investing in HomeSide, and ended up taking a $2.2 billion writedown on the business before selling it in 2002. It also sold its underperforming Irish banks in 2004.

NAB is the lowest quality bank of the major four. Their acquisition track record is patchy and their UK exposure makes them vulnerable, said Mark Nathan, a portfolio manager at Fortis Investment Partners. (Editing by Muralikumar Anantharaman)

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